German federal government plans a revision of the interest deduction for inter-company financing from 1 January 2024

July 25, 20230

On July 17 of this year, the German Federal Ministry of Finance presented a draft bill of the so-called Growth Opportunities Act, which, among other things, provides for a limitation of interest deductibility.


How has the interest deduction been regulated so far?

According to the current regulations in § 4h of the Income Tax Act (EStG) and § 8a of the Corporate Tax Act (KStG) (interest barrier), net interest expenses are only deductible up to 30% of a company’s EBITDA. Undeducted interest and unused EBITDA margins can be carried forward to subsequent financial years as so-called interest carryforwards or EBITDA carryforwards.

The previous interest barrier has not yet come into effect if:

(a) the taxpayer’s net interest expense is less than EUR 3 million (exemption limit), or

(b) the taxpayer does not belong to any group (stand-alone clause), or

(c) the taxpayer belongs to a group, but the relevant equity ratio is at least as high as the equity ratio of the entire group (so-called equity escape).


What should change in the future regarding interest deduction?

Due to the EU’s Anti-Tax Avoidance Directive (ATAD), there is a need to adjust the interest deduction. The interest deduction restriction is planned in Section 4h EStG-E as follows:

  • the group-related nature of the stand-alone clause, and
  • the so-called equity escape

can no longer be maintained. At the same time, the current exemption limit is to be converted into an allowance that exhausts the maximum amount of EUR 3 million permitted by ATAD.

An anti-fragmentation provision in Section 4h (2) of the draft Income Tax Act is intended to prevent arrangements by which this allowance can be claimed several times by dividing or founding several companies for one investment (so-called similar companies).

Furthermore, the legislator uses the reform of the interest deduction:

  • to synchronize the concept of interest with ATAD, and
  • to introduce a statutory interest rate cap between related parties.


How does the legislator intend to define the concept of interest in the future?

The concept of interest is to be synchronized with the concept of interest according to ATAD and accordingly broadened in the future. Pursuant to Section 4h (3) sentence 2 EStG-E, in addition to interest expenses as remuneration for the provision of borrowed capital, interest expenses for other expenses comparable to interest, as well as expenses for the procurement of borrowed capital, will in the future also be subject to the prohibition of interest deduction.

How is the interest rate limit of Section 4l EStG-E supposed to work?

Since, with regard to the level of an appropriate interest rate for cross-border loans, the financial strength of the company paying the interest is taken into account, according to the explanatory memorandum to the draft law, structuring possibilities open up, which are used for the transfer of profits through the interposition of insubstantial companies to low(er) taxing countries.

Therefore, in the future, the deduction of operating expenses in these cases will be limited to an appropriate amount. Accordingly, interest expenses should, in principle, not be deductible if they are based on an interest rate above the maximum rate. The maximum rate is to be the base interest rate, which has been increased by two percentage points in accordance with Section 247 of the German Civil Code (BGB).


Base interest rate                         3.12% (as of 1.7.2023)

Surcharge                                      2.00%

Maximum interest rate             5.12%


Even if an arm’s length interest rate of e.g. 6.00% were appropriate, 0.88 percentage points of the interest paid would not be tax-deductible and would lead directly to double taxation in the amount of this part.

Why exactly a surcharge of 2.00% on the base interest rate should lead to an appropriate restriction and not 1.00% or 3.00% is not explained in the explanatory memorandum to the law. In this case, the legislature intervenes directly in the basic features of the arm’s length principle by legally regulating the appropriateness of an interest rate. It remains to be seen to what extent this idea of legally undermining the arm’s length principle will also have an impact on other areas.


The draft of the interest rate limit also applies to domestic situations

According to Section 4l sentence 3 EStG-E, the interest rate limit is to apply only to interest expenses due to a business relationship between related parties within the meaning of Section 1 para. 2 AStG. Although, according to the explanatory memorandum to the law, the legislator apparently only wants to cover inbound situations with the interest rate barrier, the draft in its current version includes both domestic and foreign loans in the scope of application. The definition of being close according to Section 1 para. 2 Foreign Tax Act (AStG) expressly refers not only to being related to persons in Germany, but also defines being related in general. In this respect, the draft law either overshoots the original intention formulated in the explanatory memorandum or deliberately pre-empts the accusation of a violation of European law by means of an unclear, ambiguous possibility of interpretation.



Section 4l of the draft Income Tax Act provides for the following exceptions:

Exception 1: If the taxpayer provides proof to the contrary that both the creditor and the ultimate parent company could only have received the capital at an interest rate above the statutory maximum rate, the maximum rate is the interest rate that could have been obtained by them in the best case (Section 4l sentence 2 EStG-E). How this proof is to be provided is left open in the explanatory memorandum to the law. So far, in any case, it has been the case that a bank offer to prove arm’s length is usually rejected by the tax authorities on the grounds that an offer has actually not been carried out and may have a courtesy character.

Exception 2: the interest threshold should not apply if the taxpayer proves that the creditor is engaged in substantial economic activity in the State in which he or she has their registered office or management. For this purpose, the substance requirements pursuant to Section 8 (2), (3), and (5) of the Foreign tax Act (AStG) are to be taken as a basis(Section 4l sentence 2 EStG-E). Re-exception: This substantive exception should not apply if the creditor is domiciled in a state that does not guarantee sufficient transparency in tax matters by way of administrative assistance through the exchange of information in accordance with the Tax Haven Defence Act.


When will the new regulations come into force?

The legislative process, including the voting rounds within parliament and with external experts, has thus been set in motion and is expected to be completed by the end of 2023. Whether this timetable is tenable remains to be seen. The regulations are to come into force on January 1, 2024.

The timetable is planned in detail as follows:

– 17. July 2023:                            draft bill (submitted)

– 16. August 2023:                       Cabinet decision government draft (planned)

– 10. November 2023:               Adoption of the German Bundestag (planned)

– 15. December 2023: Approval by the German Federal Council (planned)

– Time open:                                 Proclamation



In addition to the current developments on the capital markets since 2022, there is now an- other reason to review existing I/C financial transactions. We recommend a timely review, if necessary adjustment, and documentation of intra-group loan transactions to record the effects of any new interest deduction regulations from January 1, 2024.


Author: Carsten Schmid, Transfer Pricing & Friends GmbH, Stuttgart

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